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AvalonBay Communities, Inc. AVB has high-quality assets located in some of the premium U.S. markets, which enable the company to generate steady rental revenues. Its portfolio is well diversified, with its same-store portfolio comprising a decent number of both suburban and urban assets. This has been the saving grace for AvalonBay during the pandemic, as though the company’s urban portfolio has been encountering choppy environment, the sub-urban portfolio is performing comparatively better.
The company’s earnings growth in the upcoming years is likely to be further supported by ongoing developments and new starts. During the second quarter, AvalonBay completed development worth $385 million, and of nearly $1 billion through the first half of 2021. These developments were mainly done in the sub-urban markets where fundamentals remain strong, with solid renter demand and increasing rents.
Amid improving fundamentals, AvalonBay has increased its planned investment activity for the year by nearly $1 billion between new development starts and acquisitions. The company is pursuing investment opportunities in Raleigh-Durham, NC; Charlotte, NC; Austin and Dallas, TX markets, which are likely to benefit from growth in the knowledge economy and domestic migration.
This residential REIT is also leveraging technology, scale and organizational capabilities to drive innovation and margin expansion in its portfolio.
AvalonBay has a healthy balance sheet and ample liquidity to sail through these uncertain times. As of Jun 30, 2021, the residential REIT did not have any outstanding borrowings under its $1.75-billion unsecured credit facility. The company had $487.1 million in unrestricted cash and cash in escrow, as of the same date. In addition, its annualized net debt-to-core EBITDAre for the April-June period was 5.3 times and unencumbered NOI was 94%, providing scope for tapping into additional secured debt capital if required.
Shares of this Zacks Rank #3 (Hold) company have gained 45.2% compared with the industry's growth of 41.1% so far in the year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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The trend in estimate revision for 2021 funds from operations (FFO) per share indicates a favorable outlook for the company, with the consensus estimate witnessing marginal upward revision in the past week. Therefore, given the progress on fundamentals and upward estimate revisions, the stock has decent upside potential in the near term.
However, the company has significant exposure to urban residential assets, and this portfolio is feeling the brunt. A number of factors are affecting rental demand, including health concerns of living in dense environments and the continuation of the work-from-home mandates, which are resulting in a shift of renter demand away from higher cost and urban/infill markets. Though there are signs of recovery, near-term performance is expected to reflect the still challenging climate in many of its markets.
It is also feared that the struggle to lure renters is here to stay, as supply volumes might remain elevated in some of its markets. In fact, following delays in project timelines, completions bounced back in the last half of 2020. During the June-end quarter, though demand was strong, completions were also substantial. This trend is likely to continue in the rest of the current year as well, with the ongoing construction standing at a high level, indicating a sizeable number of apartment deliveries in the upcoming period. Therefore, the recovery is likely to be moderated by adverse impact on pricing power and an elevated level of concessions.
Stocks to Consider
The Zacks Consensus Estimate for Equity Residential’s EQR current-year funds from operations (FFO) per share has moved up marginally over the past week. The company currently carries a Zacks Rank of 2 (Buy).
The Zacks Consensus Estimate for American Homes 4 Rent’s AMH 2021 FFO per share has moved 3.9% north to $1.33 over the past month. The company carries a Zacks Rank of 2, currently.
Preferred Apartment Communities, Inc. APTS carries a Zacks Rank of 2, at present. The Zacks Consensus Estimate for the ongoing year’s FFO per share has been revised 17.6% upward to $1.00 over the past month.
Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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AvalonBay Communities, Inc. (AVB) : Free Stock Analysis Report
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